Court Pick Kavanaugh’s Views Could Limit Tax Rule Challenges

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By Carolina Vargas

Supreme Court nominee Brett Kavanaugh’s interpretation of two laws could curb challenges to tax regulations and allow courts more leeway to reject agency rules if his views prevailed in court cases, practitioners said.

Kavanaugh has expressed a broad interpretation of the Anti-Injunction Act, which bars any lawsuits for the purpose of restraining the assessment or collection of taxes, and has been critical of the landmark 1984 Supreme Court decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. In Chevron, the high court held that a court may not substitute its own interpretation of a statute over a reasonable one by the regulatory agency.

“If Kavanaugh’s views prevailed on the Supreme Court, taxpayers could not challenge tax regulations until they were enforced, because Kavanaugh believes Section 7421 forecloses that type of challenge,” said Andy Grewal, a professor at the University of Iowa College of Law, referring to the nominee’s view on the Anti-Injunction Act.

Kavanaugh’s interpretation of the act wouldn’t be favorable for taxpayers, Patrick Smith, a partner at Ivins, Phillips & Barker, Chartered in Washington, told Bloomberg Tax. Smith said that while there aren’t many cases that deal with the act, they often are decided by a narrow margin.

If confirmed, Kavanaugh would replace Justice Anthony Kennedy, who announced his retirement June 27. Kavanaugh, 53, previously worked as George W. Bush’s White House staff secretary and worked for Bush during the 2000 Florida vote recount. He has been on the U.S. Court of Appeals for the District of Columbia Circuit since 2006.

Kavanaugh’s Rulings on Anti-Injunction Act

In 2011, Kavanaugh dissented from the majority in Seven-Sky v. Holder, a case challenging the Affordable Care Act, where the ruling upheld the health insurance mandate. Kavanaugh dissented based on his belief that the Anti-Injunction Act precluded the court’s consideration of the merits.

“Under the Anti-Injunction Act, a taxpayer seeking to challenge a tax law must first pay the disputed tax and then bring a refund suit, at which time the courts will consider the taxpayer’s legal arguments. Or, a taxpayer may raise legal arguments in defending against an IRS enforcement action. But a taxpayer may not bring a pre-enforcement suit,” he said. The challenge to Obamacare was a “pre-enforcement suit” and was thus barred, he said.

In the ACA decision, Kavanaugh held that the Anti-Injunction Act continues to have a broad scope and pointed to the U.S. Supreme Court’s 1974 decision in Bob Jones University v. Simon. “The Supreme Court has held that the Anti-Injunction Act does not apply in cases where the Government’s argument in support of the tax is frivolous,” Kavanaugh said.

Kavanaugh’s opinion in that case is consistent with his opinion in Cohen v. United States, which involved telephone excise tax collections. He dissented in part from the majority opinion, which ruled that the Administrative Procedure Act prevented the case from being pursued at all. The APA sets out requirements that federal agencies must follow when creating new regulations.

Kavanaugh said the APA challenge had been brought prematurely and that under the ripeness doctrine, the plaintiffs should have filed a refund case “only after complying with the exhaustion requirements of § 7422(a), which they have not done.”

In Florida Bankers Association v. United States, Kavanaugh wrote for the court and discussed the interpretation of the Anti-Injunction Act, ultimately rejecting two banking groups’ challenge to bank-reporting penalties, Grewal said.

Death of ‘Chevron’ Doctrine

Kavanaugh could seek to eliminate the use of the landmark administrative law ruling, which gives deference to agency expertise, Smith said.

The Supreme Court’s 1984 decision in Chevron held that a court may not substitute its own interpretation of a statute over a reasonable one by the regulatory agency. For this deference to apply, the court must first find that the statute is ambiguous, and then that the agency interpreted it reasonably.

The Chevron doctrine is used to determine whether a federal agency had the statutory authority to issue a regulation and whether it reasonably interpreted the statute.

“Kavanaugh has expressed reservations over Chevron deference,” Grewal said. “That means that once a taxpayer is able to challenge a tax regulation, Kavanaugh may be more inclined to strike that regulation down than other judges.”

The Internal Revenue Service and the Treasury Department have been challenged for their broad interpretation of the tax code. Opponents have argued that they are subject to the same administrative law restrictions as other federal agencies.

Smith said that Kavanaugh’s stance on Chevron is consistent with the thinking of Justices Clarence Thomas and Neil Gorsuch. If confirmed, the next step could be “to substantially cut back on Chevron, if not totally cut Chevron,” he said.

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